Where and How Should You Invest Your Retirement Corpus?

How to Invest the Retirement Corpus?

While there are many strategies to invest the retirement corpus, one of them is the 3-bucket strategy. In this strategy, you can split the retirement corpus into three buckets.

1) Liquidity Bucket

The liquidity bucket is for taking care of your short-term requirements for the next one to two years. The short-term requirements can include your regular monthly expenses, medical expenses, any ad hoc or unplanned expenses, etc.

The liquidity bucket money can be kept in a bank savings account, liquid or money market debt fund, or other fixed-income products. Any regular or ad hoc cashflows from any financial products can be put in the liquidity bucket. Some of these cashflows can include:

1.  Interest from fixed deposits, corporate bonds, Government small savings schemes, etc.
2. Dividends from shares, mutual funds, etc.
3.  Distributions from REITs or InvITs,
4. Pension from NPS, pension plans, annuities, etc.
5. Any other cashflows from any financial products

The objective of the liquidity bucket is to make money available whenever required. Liquidity takes precedence over maximising the returns, getting tax benefits, or anything else. From time to time, you must replenish the liquidity bucket from the other two buckets discussed below.

2) Safety Bucket

The safety bucket is for taking care of your medium-term requirements for the next three to five years beyond the liquidity bucket. The objective of the safety bucket must be to maintain a balance between liquidity and growth.

The safety bucket money can be kept in fixed deposits, corporate bonds, debt mutual funds, small savings schemes, hybrid mutual funds, etc. You may keep a maturity tenure of financial products in the safety bucket for up to five years.

The higher tenure compared to the liquidity bucket gives the safety bucket investments time to grow. Your aim should be to generate inflation-beating returns from the safety bucket. The safety bucket may be used to replenish the liquidity bucket from time to time. The safety bucket may be replenished from the growth bucket discussed below.

3) Growth Bucket

The growth bucket is for growing the retirement corpus investment and creating wealth for you. The investments in the liquidity and safety buckets will take care of your financial needs for the next seven to eight years. It is advised that the corpus in this bucket should not form a very large part of your overall retirement portfolio unless you have a long-term horizon for these investments. Typically, most people invest for growth from their retirement corpus for legacy planning, leaving behind investments for their loved ones. 

The growth bucket money can be kept in long-term financial products like:

1.  Diversified equity mutual funds
2. Shares or stocks with a Long-term horizon
3. Real estate
4. Gold, silver, etc.

As these are long-term investments, they can benefit from the power of compounding and grow your retirement corpus. The money from the growth bucket may be used to replenish the safety bucket from time to time.

Benefits of Investing the Retirement Corpus

When you invest the retirement corpus properly, you can be assured of a fixed income that can cover your regular expenses. Having income surety during retirement years gives the much-needed peace of mind. With income surety, you can look forward to spending time with family members and others, pursuing hobbies, travelling, engaging in social service, etc.

Where to Invest Retirement Corpus?

Some financial products you can invest in your retirement corpus include the following.

1) Debt mutual funds

You can invest a part of your retirement corpus in debt mutual funds and start a systematic withdrawal plan (SWP). An SWP can give you a monthly income for your regular expenses.

2) Small Savings Schemes

A part of the retirement corpus can be invested in the Senior Citizens Savings Scheme (SCSS). At the time of investment, it gives you a deduction from taxable income under Section 80C of the Income Tax Act. You will get quarterly interest, which can be credited to your savings account. An SCSS account can be opened at Post Offices, Public Sector Banks, or specified private sector banks.

If you were investing in a PPF account during your working years, you can continue with it during your retirement years. A PPF account gives you deduction from taxable income under Section 80C at the time of investment. The interest earned is also tax-free. The combination of tax deduction at the time of investment, the decent interest rate, option to extend beyond 15 years, and tax-free returns makes PPF a good investment product.

3) Hybrid Mutual Funds

You may choose hybrid funds where the debt component is higher than the equity component. The debt component will provide stability, and the equity component has the potential to provide upside.

4) Annuities

Did you have invested in the National Pension Scheme (NPS) during your working years? If yes, you will have to invest at least 40% of the accumulated corpus in annuities. Annuities can give you a specified income at a specified frequency (monthly/quarterly, etc.) for a specified number of years.

Things to Consider When Investing the Retirement Corpus

While investing the retirement corpus, work with an investment expert who can design a customised investment plan based on your needs. During retirement, avoid speculative products like equity derivatives (futures and options). While investing in corporate bonds, stay away from smaller companies without much performance track record, even though they may offer higher returns. Stay away from people giving investing tips and get-rich-quick schemes, like MLMs. These can be scams, and there is a high probability of losing money in these schemes.

How to Make the Most of Your Retirement Fund?

We have explained using the three-bucket strategy to invest your retirement corpus. It will give you one of the best combinations of liquidity, safety, and growth for your retirement corpus. Within the three-bucket strategy, we have also explained in which financial products you can invest your retirement corpus. However, it is always best to work with an investment expert. Based on your needs, the investment expert can design a customised plan for you to deploy the retirement corpus. Once the corpus is deployed and the monthly income starts, you can enjoy your golden years as per your plans. Financial independence during retirement years is the best way to enjoy retirement.

FAQs

During Retirement, Apart From Investing the Retirement Corpus, What Are the Other Things That I Should Be Aware Of?

During retirement, some of the things that you should be aware of include:

1.  Maintaining an emergency fund
2. Having adequate health insurance
3. Repay all loans before retirement. As far as possible, don’t take any loans during retirement
4. Ensure all the financial products have a nomination. Update the nominee(s), wherever required.
5. Do estate planning by making a will or updating an existing will, if required

I Have Achieved All My Financial Goals. Why Should I Have Life and Health Insurance During Retirement?

If you have achieved all your financial goals and have a sufficient retirement corpus, you may not need term life insurance. If you want to pass on the term life insurance proceeds after your demise as a legacy to your legal heirs, you may continue with your life insurance cover.

Health insurance is essential in all stages of life, including retirement. Old age is when an individual is more vulnerable to illness. A major hospitalisation event with a bill running into Lakhs of Rupees has the potential to derail your retirement plan. Hence, you must have health insurance during retirement. You should evaluate the existing health insurance cover and increase it if required.